Change Compensation Formulas for Older Practitioners

The question of how to compensate partners is central to every practice. However, developing a plan to do so can only be effective when it results in maximum profits within the framework of a quality practice.

Older practitioners present special compensation problems. Senior professionals are unlikely to have been educated in the current "eat-what-you-kill" philosophy as younger physicians have. Today, the emphasis in most practices is on production, and compensation is directly related to the matter. These formulas often ignore the fact that profits are not always directly attributed to individual collections. They also include the profits of nonpartner physicians as well as those profits produced by paraprofessionals. And, as administrative time is necessary in any practice, its compensation cannot be based on a productivity formula alone.

Strive to Be Equitable in Practice

To be successful, compensation formulas must be equitable, and all physicians must understand and trust the formula. The following are three strategies that have worked well in past practices with older practitioners:

• Allocation of profit on a base formula/production formula. The benefit of this formula is that it recognizes that everyone shares equally in some portion of the profits. Profits produced by nonpartner physicians are shared on an equal basis, which is fair to all partners. Older practitioners, who most likely do administration best and are most qualified to make business decisions, are recognized with compensation that cannot be met when you are not treating patients.
• Allocation based on production/collections. This method works well with older practitioners who have reached retirement age and want to continue working—and who desire to work less than a full work week. Under this formula, the senior physician is compensated at a fixed percentage of their production/collection. Fringe benefits may still be paid, and the balance paid as salary. The group will require partner management, and if the older physician provides that service, they can be paid a salary based on that service. Should another partner provide this service, it also should be recognized with an appropriate salary.
• Compensation based on days worked. This formula works best in groups where each member provides the same patient service. It allows the older practitioner to continue working without creating dissatisfaction among the younger partners. Days worked is the only method of compensation, and the formula is easily administered. The assumption is that everyone is equally productive. Whoever is designated as managing partner is given credit for days worked even though it is not related to patient service.

Focus on Satisfaction and Profitability

Less productive practitioners may be compensated based on production/collection as in the second method and not on days worked. The era of equal compensation has passed. Using incentives to motivate partners to produce greater profits cannot be ignored.

Herbert L. Lipman, CPA, is a partner in the Edison, NJ, office of New York City–based Weiser LLP. His practice and expertise focus on medical, dental, and legal practices, as well as small- to mid-sized privately owned businesses. He frequently consults in the areas of tax, retirement, estate, and financial planning. He welcomes questions or comments at hlipman@weiserllp.com.